The Economy, Your Pocketbook and the Recession
Paul Solman: Forgive me for not responding to questions for a few days, but among other things, I’ve been trying to analyze the results of poll posted here recently: How is the Economy Affecting Your Pocketbook? Click on “Comments” and you can read the responses, some of them quite poignant.
Before reporting and commenting on the results, a word on “polling.” It is a dicey business, even for the pros. Three key problems are SIZE of sample, RANDOMNESS of sample, UNAMBIGUITY of questions. In other words, if you’re asking a particular and small group of people – the inmates at a local prison, say – to respond to fuzzy questions, you’re probably not going to learn very much, and almost surely not much about the population as a whole.
The Business Desk poll suffers from all three problems, and then some, I’d guess. But 88 of you took the trouble to answer, so you at least deserve a tally.
According to my crude methodology (and hey, I did study statistics in graduate school), the spending “data” suggest something like a five percent decline in the next year. The borrowing “data” suggest a virtual halt.
Admittedly, a lot of you seem loan-phobic to begin with: “borrow the same – not at all” was the response of nearly a quarter of you. But only a handful said they’d borrow more, v. the more than half who intend to borrow less.
These numbers correspond with a verbal poll I’ve been doing for the past month or so, on several occasions at public gatherings where the audiences were in the hundreds, though again, far from random.
So, what might the data (let’s call them “anecdata”) mean? A back-of-the-envelope calculation reinforces the gloom that today’s employment numbers cast. Consumption represents some 70 percent of our $14 trillion dollar economy: more than $10 trillion. Five percent of that is $500 billion. So just to stay even, the economy needs half-a-trillion dollars worth of new spending from somewhere. That somewhere will be Washington, D.C. — or nowhere.
Then there’s borrowing. If businesses behave as our sample says it will, there will be a major contraction in business borrowing too in the next year. That makes up much of the “investment” slice of GDP, which implies even LESS spending (on machine goods, R&D and the like).
The job contraction of more than half-a-million today reflects the recent past, remember, a past in which consumption has been dropping at an almost four percent a year rate. Our casual survey mirrors that number – looking AHEAD.
The great fear is that downturns keep feeding on themselves. In 2001, in the wake of the dot.com collapse, the annual meeting of U.S. economists was held in New Orleans, “the first one in years to take place amidst a barrage of bad news,” as I then reported. The story included this telling exchange with Nobel laureate Joseph Stiglitz:
JOSEPH STIGLITZ: As the economy goes down, profits of corporations go down. As profits of corporations go down, they have less incentive and less money to invest. So it feeds on itself, and that leads to an implosion. Given the high level of indebtedness, they don’t want to take on more debt to invest more.
PAUL SOLMAN: And then, of course, if they have lower profits, that means that their stock prices go down; that means that we investors have less in our portfolios; then we’re going to spend less…
JOSEPH STIGLITZ: Exactly. And the fact that savings have been so low reinforces that, saying, “look, we better start saving more.” And when they start saving more, consumption goes down again.”
The famed English economist John Maynard Keynes called this over-saving during the Great Depression “the paradox of thrift.” You can certainly understand why it happens. You can see it in our survey. In 2001, it never really materialized. In the 1930’s, it took us 16 years to recover.